Americans are falling behind on their auto loans at the highest rate in nearly three decades.
With interest rate hikes making newer loans more expensive, millions of car owners are struggling to afford their payments. It’s a clear indication of distress at a time when the economy is sending mixed signals, particularly about the health of consumer spending.
The percent of subprime auto borrowers at least 60 days past due on their loans rose to 6.11% in September, the highest in data going back to 1994, according to Fitch Ratings. In April that figure slipped from a previous high of 5.93% in January. But after burning through tax returns, contending with a shakier job market and grappling with still-elevated inflation, more car owners have become delinquent.
Behind the surge is both higher car prices and borrowing costs. And with the Federal Reserve indicating it plans to keep rates higher for longer, the problem is likely to persist, especially as millions of Americans recently started paying their federal student loans again.
“The subprime borrower is getting squeezed,” said Margaret Rowe, senior director with the asset-backed securities group at Fitch. “They can often be a first line of where we start to see the negative effects of macroeconomic headwinds.”
Arielle Larsen, a 27-year-old college student in Maryland, knew it was risky to neglect her car payment, but she just didn’t have the money. When she looked out her window one morning in mid-August and couldn’t see her 2015 Toyota Prius, she immediately knew what had happened: repossession.
After transferring from the University of Maryland Eastern Shore to Towson University in May, she struggled to find a new job (her old one had been an on-campus position that she had to give up when changing schools), despite applying to more than 20 positions. She could barely afford her rent bill of $900, so her $468 monthly car bill fell by the wayside.
Larsen didn’t have the money to get her car back after it was seized, so it went to auction. Now, she’s stuck walking hours to campus each day for classes.
“It’s been very stressful — it’s like how do I get around now?” she said. “I don’t leave the house much because getting to places takes forever.”
Having access to a car is a necessity for millions living in areas without reliable transportation. Yet, prices for both used and new vehicles are historically high, declining only slightly from peaks during the pandemic, which has priced out many low-income workers who often need a car to get to work.
For those with the best credit scores, interest rates are about 5.07% for a new car and 7.09% for a used vehicle on average, according to Bankrate. And for those with the worst credit, rates are about 14.18% and 21.38% for new and used cars, respectively.
Josephine Corvacchioli in Denver said that with her credit score of 580 she’s paying an interest rate of 13.58% on her 2019 Honda Ridgeline truck. The expense comes out to roughly $700 a month for the loan and insurance.
The 28 year old makes $17.50 an hour at Costco, so she’s struggling to make her car payment along with her rent, all while she tries to pay down more than $20,000 in credit card debt.
She’s trying to trade in the car for something cheaper, but that’s difficult while she’s behind on payments and worried it might be seized.
“It’s a constant thing for me, I’m checking it to make sure it’s not repossessed,” Corvacchioli said. “They said as long as I pay before the next pay date I’m fine, but have to make a payment before next month.”
As payment delinquencies rise, repossessions are expected to increase accordingly. Cox Automotive estimates that 1.5 million vehicles will be seized this year, up from 1.2 million last year, although that’s still below pre-pandemic levels.
Kelly Donnell, a 31-year-old bartender in Raleigh, North Carolina, had her car repossessed after her tips started to dry up earlier this year and she began to miss her $400 auto payments.
Her parents were able to loan her the money to get back the 2019 Jeep Cherokee, which she bought in August 2021 for $19,000. But now she’s in debt to them on top of her usual expenses, which keep increasing with inflation, especially on her diminished salary.
“When the economy takes a hit, I feel it,” she said. “I make $2 an hour and live on tips. When things get more expensive, people have less money and they’re tipping less. So there goes my wages.”
This article was provided by Bloomberg News.